Investors need to be cold, hard and real
I went on an induction course in the 1980s. All new employees went through it. In those days people didn't tart around the employment markets as they do now, they joined a company in the hope and expectation that they would work from the mail room up to the CEO's office and end up somewhere in between.
The course was designed to indoctrinate us into the company culture and allowed them to assess us and better place us within their organisation. An expensive investment and only possible on the assumption that employees were loyal and worth investing in.
The first exercise of this one-week residential course was a personality test, and in order to make any sense of anything so complex the analysis had to generalise. There are as many shades of personality as there are people, of course, but the test broke us all down into groups. Based on our answers to a series of multiple choice questions we were forever labelled by our employer as one of four basic personality types which rather curiously included Analysis, Action, Harmony and Spectator.
They had questions like: "If a bar fight started in front of you, would you (a) assess the situation before getting involved, (b) dive straight in throwing punches, (c) try and stop it or (d) watch."
I was 22. At that age I left everything to the last moment and that particular morning I had left my house in Fulham Road, London just a tad late and thanks to the ensuing rip along the embankment on a Yamaha FJ1200 motorbike playing Bachman-Turner Overdrive on the Walkman I had arrived pretty pumped. So when faced with the question, "What would you do if you saw a granny at the side of the road?", rather than ask her if she needed help, grab her arm and start walking or ignore her, I had picked the option to push her into the road. It seemed like the amusing thing to do.
I scored maximum points on Action that day, the highest Action score of any of the dealers at UBS Phillips & Drew. They were happy, to say the least. That's what they wanted on the sales desk, they said, people who eat red meat. So that's where I ended up, with all the other Action men and granny killers. Labelled for a career by Bachman-Turner Overdrive.
Personality is a huge factor in the investment process and at the Australian Investors Association Conference on the Gold Coast last week the founder of Relate Empower Deliver, David Chia, talked on the subject. Give 10 people exactly the same data, he said, and ask them what they think and they will give you 10 different answers. The data is the same but our personalities conspire to divine 10 unique interpretations. Personalities dictate investment success or failure, not the data. The data is not the determining factor of success or failure, "you" are.
It is well understood in the texts that humans are not geared to the investment process because they are geared to emotion, likes, dislikes, even their tax status, none of which have any bearing on where a share price is going to go next but all of which find their way into the investment process.
If you find yourself saying "I hate XYZ" or "I like ABC" about a particular stock, for instance, you have a bias that is preventing a clinical decision. Net effect, you should be on the lookout for your own bias and for other people's bias. The more bias the less effective their advice.
Having a predisposition to a particular stock is a dangerous failing. Having a predisposition to optimism in a market that has gone down 9.6 per cent a year for five years is a costly emotional bias. Being predisposed to pessimism is the same. Pride is a bias - the desire not to be wrong - and there are many "experts" whose objectivity has been sacrificed to bias based on their earlier calls. The moment they care about being right or wrong, they have lost value.
When it comes to investment, you need to be cold, dispassionate and unaffected. On that basis, who do you trust more: yourself, a guru, or maths, science and a computer chip?
- Marcus Padley is a stockbroker with Patersons Securities in Australia. His views do not necessarily reflect the views of Patersons.
Sydney Morning Herald